In this article 8 sections
The short answer: most business sales pay the owner most of the price at closing, plus some mix of a seller note, an escrow holdback and, occasionally, an earnout. A seller note is normal and often helps the deal get financed. An escrow holdback is the fair compromise when a buyer wants protection. An earnout puts part of your price in the hands of the person who now controls the business, and our position is that you should refuse an offer built on one.
Why is all cash at close so rare?
Most owners start where you would expect: “I want cash. I am not carrying a note.” All cash is the cleanest outcome, and when a seller truly will not carry anything, we say so up front and screen buyers for it.
But it is rare, for a plain reason: most buyers do not have the whole price in the bank. Many put roughly 10% down and finance the rest. The buyer’s lender then becomes a second party in your deal, and lenders like to see the seller keep some money in the business. A seller note tells them you believe the business will keep performing.
So the question is rarely “cash or no cash”. It is which structure carries the part that is not paid at closing, and how big that part is.
The three structures, side by side
| Seller note | Escrow holdback | Earnout | |
|---|---|---|---|
| What it is | You lend part of the price back to the buyer, repaid with interest | Part of the price is held by a neutral party for a set period | Part of the price is paid later only if the business hits agreed results |
| Typical size | 5% to 10% of the price | A slice of the price, agreed in the LOI | Can be large, which is the problem |
| When you get paid | Monthly or quarterly over three to five years, unless the lender requires standby | Released after several months to a year if no claims | One to three years out, if targets are met |
| Who carries the risk | You carry credit risk on the buyer, behind the bank | Shared: the money exists and sits with a neutral party | You carry the risk of how the buyer runs the business |
| What you control | The terms: size, rate, security, remedies if a payment is missed | The claims process and the release date | Very little after closing |
What a seller note really is
A seller note sounds like a sacrifice. It is closer to a loan you are paid interest on, interest the bank would otherwise earn. Lenders prefer to see one, and a slightly higher price with a note can beat a lower all cash number.
The test we give owners is the practical one: if you are happy with what lands at close, the note is a bonus with interest attached. If you are not happy with the cash at close, no note will fix that, and the structure needs to change before you sign the LOI.
Two things to know. First, the buyer’s lender can set rules on when a seller note is paid, and on SBA deals a seller note that counts toward the buyer’s equity must sit on full standby, with no payments, for the life of the bank loan. That makes a note less attractive, so it should be priced in. Second, the terms matter as much as the size: the interest rate, how partial payments apply, prepayment, and what happens if a payment is missed.
Why an escrow holdback is the fair compromise
A buyer has a fair concern: something you represented about the business could turn out to be wrong. An escrow holdback answers that concern without tying your money to the buyer’s decisions. The cash exists from day one. It sits with a neutral party. If a valid claim comes up, it is paid from the holdback; if not, it is released to you on a set date.
That is why, when a buyer wants protection, we push for a holdback over an earnout. Experienced buyers know this too: fund as much as you can at close and use a holdback rather than a long earnout, because multi year contingent payments are the hardest thing for a seller to accept and the easiest to dispute.
Why you should refuse an offer built on an earnout
An earnout pays you later if the business hits agreed results. The trouble is who controls those results. After closing, the buyer decides pricing, hiring, which costs land on your former business, when to invest and how profit is calculated. Every one of those decisions can move the number your payment depends on. There are many ways to make an earnout miss, most of them legitimate business choices.
That is why we are skeptical of any offer whose headline price depends on an earnout. A high number with a large earnout is often a lower offer in disguise. Where a small earnout appears as a sweetener on top of a solid cash offer, we keep it small, short and measured on something hard to adjust, such as revenue.
An illustrative example
Illustrative numbers, not a real deal.
Two offers for the same business:
- Offer A: $6.0M headline. $4.8M cash at close, $1.2M earnout over two years tied to profit targets.
- Offer B: $5.7M headline. $5.13M cash at close, a $285K seller note over five years with interest, and $285K in escrow for twelve months.
Offer A looks $300K better. But only $4.8M of it is certain, and $1.2M depends on how someone else runs the business. Offer B puts $330K more in your hands at closing, the note pays interest, and the holdback comes back to you unless a valid claim is made. Most owners who see it laid out this way pick Offer B.
The ranking, in order
- Cash at close. The more of the price funded at closing, the better.
- A seller note, sized so you are happy with the cash at close. Normal, helps financing, and pays interest.
- An escrow holdback when the buyer needs protection. Fair to both sides.
- An earnout. Refuse an offer built on one. Accept only a small, short one on top of a solid cash offer.
We tell owners the likely shape of their deal before they ever meet a buyer, so none of this arrives as a surprise.
Settle the structure in the LOI, not after
Two habits protect your structure.
Negotiate it before you sign the LOI. Assume the LOI is your best offer. After it, due diligence mostly finds reasons for the price to come down, and structure tends to move the same way. Do not count on a deposit to hold the buyer to it either: deposits are rare and hard to enforce. A buyer’s real commitment is their own legal and accounting spend, and what protects you is a short exclusivity period with hard milestones.
When something in writing worries you, call. A first legal draft does not always match what the two sides agreed on the phone. When it does not, do not let it sit over text messages. Pick up the phone that day.
If you have an offer in hand or expect one soon, the guide below walks through what happens between the LOI and closing, and where the structure gets decided.
Frequently asked questions
Do I have to take an earnout or a seller note?
A seller note is very common, and lenders like to see one because it shows you believe in the business. An earnout is different: you have no control over how the business is run after closing, so the payment is easy to dispute. Our position is that you should refuse an offer built on an earnout. The fair compromise is an escrow holdback: cash at close, with a slice held by a neutral party for a set period.
Do I get all cash at close?
Rarely all of it. Most buyers ask for a seller note, often 5% to 10% of the price, paid over three to five years with interest. The practical test is simple: if you are happy with what lands at close, the note is a bonus with interest attached.
Is there a deposit, like earnest money in real estate?
Almost never, and it is usually not worth chasing. A house inspection takes a day; business due diligence takes weeks, so buyers will not put money down before they understand what they are buying. A deposit is also hard to enforce. What actually protects you is a short exclusivity period with hard milestones.
Can the price go up after the LOI?
Assume the LOI is your best offer and negotiate hard there, including the structure. After the LOI, due diligence mostly finds reasons for the price to come down. The realistic exception is a significant positive change in the business after signing.
What is an escrow holdback?
Part of the price, held by a neutral third party for a set period after closing, usually several months to a year. If the buyer finds a problem you promised was not there, a claim is paid from the holdback. If not, the money is released to you. You are not depending on how the buyer runs the business.
Will the buyer have all the cash?
Most do not, and that is normal. Many buyers put roughly 10% down and borrow the rest. That means the buyer's lender is effectively a second party in your deal, and its rules can shape when a seller note gets paid.
Thinking about selling? Let's talk.
Four short answers, then a confidential call with Paul Cheetham, our founder, about your business, your timing and what buyers would pay. Representation is success fee only: nothing is owed unless your business sells. Under $2M in revenue? See the Seller Launch Kit. See the deals we have closed.